Order Code RS21687
Updated January 11, 2005
CRS Report for Congress
Received through the CRS Web
Ecuador: Political and Economic Situation
and U.S. Relations
Clare Ribando
Analyst in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Summary
In January 2003, Lucio Gutierrez of the Patriotic Society Party (PSP), a former
army Colonel who was part of the junta that toppled the government of Jamil Mahuad
in January 2000, became the country’s sixth president in seven years. Early in his
presidency, President Gutierrez abandoned his populist rhetoric and adopted some
market-friendly economic reforms in order to secure support from the International
Monetary Fund (IMF). His power was severely limited, however, by opposition parties
that dominated the Congress, indigenous protests, and allegations of corruption. Despite
his party’s poor performance in the October 17, 2004 municipal elections, President
Gutierrez has found new congressional allies who have helped him stave off
impeachment proceedings and place many political allies on the country’s high courts.
Ecuador continues to cooperate with the U.S. counter-narcotics program and has
mobilized its military and police forces to help control spillover effects from the conflict
in Colombia. Ecuador and the United States possess a significant trade relationship that
has been enhanced since 1992 by the Andean Trade Preference Act. The two countries
are currently negotiating, along with Colombia and Peru, for an Andean Free Trade
Agreement. This report will be updated periodically.
Background
Slightly smaller than Nevada, Ecuador has a population of just under 13 million
people. Since independence from Spain in 1830, Ecuador lost 61% of its total land area
as a result of border conflicts with Brazil, Colombia and Peru. Despite its small size,
Ecuador’s location on the Pacific Coast between Colombia and Peru, two major drug
producing countries, makes it of strategic importance to the United States. Ecuador is the
15th largest oil supplier to the United States, and the 4th largest supplier (behind Mexico,
Venezuela, and Colombia) in Latin America. Ecuador is both geographically and
ethnically diverse, and has a relatively long experience with democratic rule. The
population is ethnically mixed: 55% mestizo (mixed Indian and Spanish descent), 25%
indigenous, 10% Caucasian, and 10% African. Some 56% of the population and more
Congressional Research Service ˜ The Library of Congress

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than 80% of indigenous Ecuadorians live in poverty.1 Although Ecuador returned to
civilian rule in 1979, the political and economic situation there has often been unstable.
Political stability in Ecuador is threatened by such forces as poverty, corruption, and
political fragmentation, in addition to the difficulty of balancing between popular
demands and fiscal reforms.
Political Context
Ecuador was once considered a relatively stable country located in the conflicted
Andean region. In recent years, however, Ecuador has weathered a number of serious
governmental and economic crises. The last two popularly elected presidents did not
complete their terms. Abdala Bucaram was removed from office constitutionally in 1997,
after being declared mentally unfit by the National Congress and allegedly
misappropriating $90 million worth of public funds. Jamil Mahuad was ousted by a coup
in 2000 after a prolonged economic crisis. The current President, Lucio Gutierrez,
inaugurated on January 15, 2003 to a four-year term of office, was an unknown army
Colonel until his involvement in the 2000 coup that ousted Mahuad. President Gutierrez,
elected with 55% of the vote on a leftist platform, with the support of poor and indigenous
voters, is now confronting a political crisis of his own. His PSP party lost the support of
the Pachakutik indigenous party in August 2003, and holds only 6 seats in the 100-
member Congress. In October 2004, Gutierrez’s approval rating hovered at just 15%, his
party performed poorly in the municipal elections, and he was facing possible
impeachment proceedings.2 By November 2004, Gutierrez had formed a new coalition
with support from Bucaram’s Roldosista Party (PRE) and Alvaro Noboa’s National
Action Institutional Renewal Party (PRIAN). He has been under criticism recently for
using his legislative coalition to pack Ecuador’s courts with his political allies.3
There are historical antecedents for the instability that has recently plagued
Ecuadorian democracy. Since 1830, regionalism and personalism have defined
Ecuadorian political culture. Throughout the country’s history, Quito, the colonial capital,
and Guayaquil, the industrial port, have battled for urban dominance. Superimposed
against this regional divide are the ethnic and class divisions that have encouraged
political parties to develop as electoral machines for competing segments of the elite.
Following the return to democracy in 1979, party splits, bureaucratic ineptitude and
rampant corruption proliferated. Important reform measures — civil service reform, tax
laws, banking regulation — stalled in a Congress dominated by fragmented parties and
vocal opponents with vested interests to protect. As the economic situation has
deteriorated since the 1980s, voters have reacted by blaming incumbents for their troubles
and by periodically backing populist, anti-party candidates. This trend, coupled with the
country’s economic problems and rampant corruption, has led to inconsistent economic
1 “Ecuador: Indigenous Groups Break with President,” NACLA Report on the Americas, New
York: Mar/Apr 2003; Suhas Parendeka, Rob Vox, and Donald Winkler, “Ecuador: Crisis, Poverty
and Social Protection,” in Crisis and Dollarization in Ecuador: Stability, Growth and Social
Equity, Paul Beckerman and Andrés Solimano, eds.. Washington: The World Bank.
2 “Ecuador’s Congress May Pursue Gutierrez’s Impeachment,” Dow Jones International News,
October 25, 2004.
3 Michael Shifter, “President Makes Mockery of Rule of Law,” Miami Herald, January 3, 2005.

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and political policies from one administration to the next, and to the inability of elected
presidents to complete their terms. Ecuador has had six presidents in the past seven years.
Ecuador’s dependence on oil exports and remittances (cash transfers sent from
citizens living abroad), vulnerability to natural disasters, high levels of foreign debt, and
central location within the volatile Andean region have made it extremely vulnerable to
exogenous shocks. The country’s inefficient policy-making process, a system in which
a plethora of competing economic and political interests compete for political spoils, has
tended to delay or inhibit the success of policy initiatives and failed to shield the country
from external shocks.4 Two examples of this tendency have included the Ecuadorian
Congress’ rejection of a proposed hydrocarbon reform bill, intended to increase private
investment in the under-performing state-owned oil sector, and its decision to override a
presidential veto in order to enact pension increases. Both of these congressional actions
violated IMF fiscal recommendations.5
Role of the Indigenous. Ecuador’s indigenous population resides primarily in
the country’s highland and Amazonian regions. Indigenous peoples have historically been
among the most disadvantaged, under-represented groups in Ecuador. Since the
indigenous people began organizing politically in 1990, however, they have built two of
the most powerful indigenous organizations in Latin America: the Confederation of
Indigenous Nationalities of Ecuador (CONAIE) and the Pachakutik political party. While
Pachakutik currently holds 10% of the seats in the Congress, indigenous groups have
gained more notoriety for their mass protests than for their electoral successes. The
participation of Pachakutik in the Gutierrez government, which included two cabinet
appointments, marked the first time in the country’s history that an indigenous-based
political party participated in a governing coalition. Some observers argue that the short-
lived duration of that coalition has weakened the movement’s popularity, noting the
declining attendance at recent indigenous protests.6 Although the indigenous movement
is currently divided and may not pose a threat to the Gutierrez government, some
indigenous groups have stepped up protests against foreign oil companies on behalf of
environmental and economic objectives.7
Corruption. According to Transparency International, Ecuador is perceived as the
second most corrupt nation in Latin America after Paraguay, with a level of corruption
rivaling that of the Democratic Republic of the Congo, Iraq, Sierra Leone and Uganda.
In 2003, a series of arms trafficking scandals threatened to undermine the generally
positive reputation of one of the country’s most respected political institutions, the
Ecuadorian military.8 During the campaign, President Gutierrez promised to fight
governmental corruption, but has thus far been criticized for nepotism and failing to
4 Mejia-Acosta, Andres, Caridid Araujo, Anibal Perez Linan, Sebastian M. Saiegh, and Simon
Pachano. “Political Institutions, Policymaking Processes, and Policy Outcomes in Ecuador,”
FLACSO-Inter-American Development Bank, August 2004.
5 “IMF: Ecuador Must Reform Economy to Become More Competitive,” Dow Jones, August 12,
2004.
6 “Pachakutik Support on the Wane,” Latin American Regional Report, August 3, 2004.
7 “Ecuador Risk: Risk Overview,” Economist Intelligence Unit, December 20, 2004.
8 “Arms Scandal Seen Hurting Ecuador Military’s Image,” Reuters, October 25, 2003.

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secure the extradition of corrupt Ecuadorian bankers residing in the United States.
Ecuador’s Congress is investigating ongoing allegations that drug traffickers contributed
to the Gutierrez presidential campaign.9
Human Rights. The State Department Human Rights report on Ecuador covering
2003 states that “the Government generally respected the human rights of its citizens;
however, there were problems in some areas.” The report cited 11 killings by security
forces in 2003, down from 23 in 2002. Despite progress in reducing the number of
extrajudicial killings and the use of unwanted legal force, many perpetrators continue to
go unpunished as a result of lax sentencing in police and military courts. Although the
Constitution prohibits trafficking in persons, there are no penal laws to enforce that
prohibition. In June 2004, the U.S. State Department placed Ecuador on the Tier 3 list of
countries not taking adequate measures to combat trafficking in persons. Ecuador was
able to avoid U.S. sanctions, however, by taking significant counter-trafficking actions
by September 2004.10
Economic Situation
In 1999-2000, Ecuador suffered a disastrous economic crisis, the country’s worst in
more than seventy years, characterized by numerous bank failures, hyperinflation, double-
digit unemployment and an eventual currency collapse. The Ecuadorian financial crisis
revealed the deleterious effects that external shocks can have on a weak and poorly
regulated economy that is overly dependent on a few export commodities with volatile
prices. From 1993-1997, Ecuador’s three major exports — oil, shrimp, and bananas —
experienced an unprecedented boom. In 1998, El Niño rains caused an estimated $2.6
billion worth of crop damage, white spot disease hit the shrimp industry, and oil prices
plunged. These problems were exacerbated by the scarcity of credit available following
the East Asian, Russian and Brazilian financial crises. Massive exchange rate
depreciation and declining GDP meant that the government could no longer afford to bail
out private investors or failing banks incapable of repaying their dollar-denominated
debts. By late 1999, the public debt to GDP ratio was over 100% and the Mahuad
administration was faced with a full-scale economic, political and social crisis.11
In a last ditch effort to stop hyperinflation and prevent a complete currency collapse,
then-president Mahuad abandoned the country’s domestic currency in favor of the U.S.
dollar. Dollarization was also a calculated political maneuver, though ultimately
unsuccessful, to preserve the Mahuad administration. Mahuad’s successor, Gustavo
Noboa, followed through on the dollarization plan. As a result, inflation subsided and,
boosted by high oil prices, the economy grew by 5.1% in 2001 and 3.4% in 2002. The
Noboa government then created a stabilization fund using excess oil revenue and
improved the country’s tax system. However, rather than agreeing to a renewal of a
stand-by agreement with the IMF, which would have required privatizing the electricity
9 “Failure of ‘Uprising’ Extends Respite for Gutierrez ,” Latin American Weekly Report, June 15,
2004.
10 “Four Nations Move Against Trafficking in Response to U.S. Report,”
[http://www.usinfo.state.gov].
11 Beckerman and Solimano, Crisis and Dollarization in Ecuador, The World Bank, 2002.

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and telecommunications industries, Noboa responded to popular demands for increased
government spending.
President Gutierrez began his administration by appointing a pro-market finance
minister who was able to help him secure the $205 million IMF stand-by agreement that
had eluded the Noboa administration. In order to comply with IMF requirements, the
Gutierrez government attempted to restrict public spending, increase taxes, remove
subsidies, and promote private investment in the oil sector. These efforts spawned
sustained popular protests that culminated in the resignation of Mauricio Pozo, the
economy minister, in June 2004. Although the economy grew some 6.3% in 2004 as a
result of high oil prices and a weak U.S. dollar, which has made its exports more
competitive, a lack of fiscal discipline has postponed the renewal of a new (and much
needed) IMF stand-by agreement. Ecuador’s sovereign bonds have been identified as the
riskiest investment in Latin America.12
Relations with the United States
Ecuador’s relations with the United States are generally good, although the limited
U.S. assistance Ecuador has received in comparison to other Andean nations has been a
contentious issue. Ecuador is located at the epicenter of the most conflicted region in the
Western Hemisphere, and cooperates with the United States in the containment of
Colombian guerrillas and the fight against illicit narcotics. The U.S. government is
concerned about Ecuador’s high level of corruption, endemic poverty, weak political
system, and burdensome foreign debt. Ecuador is also the largest source of illegal
immigrants to the United States in South America. In addition to the problem of illegal
migration, some of which is caused by alien smuggling, the International Labor
Organization estimates that some 5,200 Ecuadorian children are internally trafficked for
prostitution.13 Ecuador was placed on the State Department’s 2004 Tier 3 List of countries
that had not adequately combated trafficking in persons, but avoided U.S. sanctions by
making progress on that issue between June and September 2004. The Bush
Administration is currently negotiating an Andean Free Trade Agreement with Ecuador,
along with Colombia, and Peru.
Counter-narcotics Cooperation. Ecuador, a major transport country for
cocaine and heroin, has worked closely with the United States in its counter-narcotics
efforts. In November 1999, the United States signed a 10-year agreement with Ecuador
for the creation of a forward operating location (FOL) at Manta, an air force base along
the Pacific Coast. Since that time, U.S. detection and monitoring operations have seized
more than 250 tons of cocaine. Ecuador received an estimated $35 million in U.S.
assistance for FY2004 and $26 million has been requested in FY2005 for law
enforcement, border security, and alternative development as part of the Andean
Counterdrug Initiative (ACI).14
12 “Long-term Bets on Ecuador Seen Hinging on Reforms,” Reuters News, September 1, 2004.
13 U.S. Department of State, Country Reports on Human Rights Practices 2003: Ecuador,
February 2004.
14 See CRS Report RL32337, Andean Counterdrug Initiative (ACI) and Related Funding
Programs: FY2005 Assistance, by Connie Veillette.

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U.S. Aid. The United States is the largest bilateral donor in Ecuador, allocating an
estimated $42 million in total assistance to Ecuador in FY2004. The Administration has
requested $52 million in assistance to Ecuador for FY2005. Four USAID goals for
Ecuador are bolstering democracy, poverty reduction, environmental protection, and
border security. On July 1, 2003, the Bush administration cut off certain forms of military
aid to Ecuador for not signing an agreement exempting U.S. service members from the
jurisdiction of the International Criminal Court. This decision cost the Ecuadorian
government $7.6 million in military assistance for FY2004. It may also result in the loss
of $13 million in Economic Support Funds and $7.6 million in military aid in FY2005.
Trade. The United States is Ecuador’s main trading partner. The United States
exported $1.3 billion in goods to Ecuador in 2003, with machinery and paper products the
leading items. In the same year, the United States imported $2.7 billion in Ecuadorian
goods, primarily oil, bananas, and shrimp. Petroecuador, the state-owned oil company,
accounts for 55% of the country’s oil production and is not slated for privatization. In
total, approximately 45% of Ecuadorian exports go to the United States. Since joining
the World Trade Organization (WTO) in 1996, Ecuador has lowered its average tariff rate
from 30% to 13%, but a number of non-tariff trade barriers, such as denying import
permits and tough sanitary controls, impede U.S. access to the Ecuadorian market.
Since 1992, Ecuador has been a beneficiary of the Andean Trade Preference Act
(ATPA). Although petroleum continues to dominate its export market, other goods, such
as seafood and cut flowers, have benefitted from the program. The ATPA was
reauthorized and expanded to become the Andean Trade Promotion and Drug Eradication
Act (ATPDEA), Title XXXI of the Trade Act of 2002, signed into law by President Bush
on August 6, 2002 (P.L. 107-210, H.R. 3009). The law extended the preferential trade
program until December 31, 2006, and expanded it to include several additional
categories of exports of importance to Ecuador, such as certain textiles, petroleum, and
pouched tuna. Six rounds of negotiations for a new free trade agreement (FTA) between
Ecuador, Colombia, Peru and the United States have been held since May 2004. In
October 2004, the Subcommittee on the Western Hemisphere of the House International
Relations Committee held a hearing on unresolved trade disputes involving U.S.
companies and the governments of Ecuador and Peru that could threaten support for the
Andean FTA.
In December 2004, Regina Vargo, chief negotiator of the Andean FTA for the United
States, asserted that, although the countries failed to reach agreements on certain
agricultural items and on intellectual property issues, the sixth round of negotiations was
“the most effective of all so far.”15 The seventh round of negotiations will be held on
January 31, 2005, in Colombia, and the eighth round has been set for March 2005.
Negotiators hope to conclude an FTA with the Andean nations well before President
Bush’s current trade promotion authority expires in mid-2005.
15 “Colombia, Peru, Ecuador with USA Close Sixth Round of FTA Negotiations,” Latin America
News Digest, December 6, 2004.

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